Natixis’ Anthony Caserta, executive director, global securities financing client strategies, and Saverio Costa, executive director global securities finance, head of securities optimization unit, Americas, outline the opportunities and pressures facing the industry as traditional securities finance models are increasingly challenged.

What are the main pressure points facing the securities finance industry and how are firms adapting their strategies to mitigate these pressures?

In addition to the pressure on spreads, the costs of doing business continue to increase as firms are faced with additional regulatory reporting requirements and the need for real-time, accurate market and credit risk assessment. And while firms are turning to technology as a major part of the solution, it is, unfortunately, also a part of the problem. Firms are faced with the daunting task of meeting the demands of an industry, which continues to evolve at an increasing pace, with aged and disconnected technology. The inefficiencies that need to be solved span from the back office to the front office of individual firms as well as through the entire securities finance market infrastructure. What will be the optimal way for participants to interact in the market place? How do individual firms deal with synchronizing old systems? Do they continue to add to the web of existing technology? Do they start from scratch with entirely new systems? Or do they perhaps consider the wide array of fintech solutions emerging in the market? These are the questions more and more firms are facing.

How is the industry employing technology and data analytics? Where are these having the most significant impact now, and where do you expect them to be employed to greatest effect over the next 5-10 years? 

There is no question that technology and data analytics are playing an increasingly important role in our industry. This is the case on three levels: internally for banks, how they interact with clients, and how all participants interact in the marketplace. Internally, the focus is on optimal allocation of scarce resources, both physical and financial, to best meet client needs and maximize profitability. It is an absolute must that resources are optimally deployed to provide maximum value for the client in a highly efficient and economical structure. This needs to be accomplished in a marketplace where natural business evolution and regulatory requirements are changing the ways in which market participants operate internally and with each other. Although internal and client optimization are certainly not going away, the biggest changes going forward will center around how banks, their counterparties and clients transact with each other, especially given the trend toward new and innovative financing solutions. 

Have you seen a change in the type or number of firms engaging in securities finance transactions? How is this driving banks and brokers to develop their services?

The good news is that while the securities finance business evolves, it continues to grow in scope. The maturing of the business, whether natural or in response to new regulations, is creating more and more opportunities. We are seeing more fintech entrants than ever in our industry - offering solutions that cover anything from operational and reporting tasks to collateral, resource and client optimization. Participants that exited the business following the crisis in 2008 continue to return. New entrants are increasing as firms realize the many solutions - from market exposure to balance sheet, collateral and yield optimization - that are available through securities finance.   

Having the ability to provide both vanilla and more complex, innovative solutions to clients on a cross-asset basis is essential for banks. This is putting a high premium on the ability for banks to move away from the traditionally siloed approach to a true centralized securities financing model.    

What are the key considerations for firms seeking to optimize and obtain the most value from their collateral?

At the core of collateral optimization is a centralized approach – a fairly simple concept, but difficult to implement. There are several factors that are key to being successful: the ability to identify and access collateral across asset types and geographical regions, the capability to accurately assess the value and market for each asset type, and the infrastructure to support the efficient deployment of the collateral to extract maximum value and minimize the associated credit, market and operational risks. Failure to address any of these areas will lead to inefficiencies. The obvious answer is technology. What’s not so obvious is what type of technology. Securities finance is a critical component of financial firms and the financial markets in general. A technology solution needs to address not only the cross-asset financing needs, but it needs to connect throughout the firm’s entire infrastructure and interact efficiently with the market.     

What do you believe the next 12 months has in store for the US securities finance industry, and how can firms position themselves to leverage opportunities that 2019-2020 may bring?

An overriding theme going forward will be that traditional models, both firm specific and market wide, will be challenged. There are a number of factors underlying and driving this trend. Although regulatory uncertainty is easing from recent levels, it is still weighing heavily on the future of the business. The pressure on spreads, rising costs and strain on resources, including balance sheet, capital and collateral are forcing firms to re-evaluate business models in order to preserve profitability. Given the many benefits of CCPs, they will continue to play a larger role in the market as they expand across asset classes and evolve to include the buy-side as well. Asset managers, who in the past may have relied on agent lenders or prime brokers, may look to take on their own financing activity to maximize returns for their clients. Traditional structures like stock loan will continue to take a back seat to more balance sheet efficient non-cash trades. Banks will reassess resource allocations to best serve their clients, who are at the intersection of rising costs, contraction in spreads, and a technological conundrum. The status quo will always be challenged in a maturing business. With all the additional forces we see today in the securities finance market, firms must be nimble. Those that fail to evolve and find innovative solutions will be left far behind.